The Dow plummeted 450 points this morning in early trading, as traders responded to a worldwide plunge in share prices over the MLK holiday, and a second straight day of near-record losses in the Asian markets. How concerned are the experts? The Federal Reserve attempted to fend off a US crash by slashing interest rates three quarters of a point just before the opening bell, prompting respected financial blogger Bonddad to describe the Fed as “Wall Street’s bitch.”
The problem is liquidity isn’t the issue — it’s counter-party risk. So long as lenders are
1.) Concerned about getting repaid on existing loans and
2.) Concerned that a party might now repay even a short-term loan
3.) In the middle of writedown hell.
Then loans aren’t going to get made. It’s that simple.
Also note the the effective Fed Funds rate is now negative. The yearly increase in inflation is 4.1% and the Fed Funds rate is now 3%, meaning the effective Federal Funds rate is in fact -1.1%. This is the situation that got us into this mess.
Of course, even an impending worldwide recession has its bright spot, with crude oil prices dropping below $88 a barrel in anticipation of reduced demand.
And by the way, in case anybody is keeping score, the Dow Industrial Index closed at 10,678 on January 18, 2001, the day President Bush was sworn into office. Last time I checked it was still below 12,000 points, even after recovering about half the early morning losses. A 12% return over seven years… below the rate of inflation. Wow. Those Republicans sure do know how to run the economy. (By comparison, the Dow closed at 3,242 on January 20, 1993, the day President Bill Clinton was inaugurated, more than tripling in value over Clinton’s two terms.)